Since I started writing about beer about four and a half years ago, the Ontario situation has become more and more interesting. There are more breweries competing for market share and there’s increased media coverage of the beer retailing problem. Martin Regg Cohn, for instance, has been on fire of late pointing out the Beer Store’s lobbying practices. I’m not going to accuse anyone of peddling influence because I don’t have a lawyer on retainer. Instead, I’ve decided to see if I can recap the problem and explain why change is extremely likely to happen in the next couple of years.
The Beer Store was never intended to be for the benefit of customers. What Brewer’s Warehousing was designed to do from the start was to take beer retailing out of the hands of the province. Even in 1927 the idea was that it would take the necessity of warehousing out of the hands of the provincial government. This was a pretty good idea as long as it was a co-op. Breweries were getting larger and the fact that everyone had a hand in the distribution system was a good thing. It made it equitable.
E.P. Taylor exploited the obvious flaw in this system and started buying up breweries left, right and center. By the early 1980’s, there were very few breweries left. Allen Winn-Sneath’s Brewed in Canada suggests there were 40 breweries left in Canada in 1980 and only 8 were not owned by Molson, Labatt or Carling O’Keefe. In Ontario, this meant Amstel and Northern Breweries. I have put the plants on a map so you can visualize what that might have looked like. The vast majority of these plants are now gone. 
This was a pretty good deal for the large brewers. The Beer Store’s organization is such that it works in your favour if you are a very large company. The fact that your beer can only be sold in predetermined locations and that the organization that runs those locations stocks those stores from centralized warehouses means that you don’t have to pay for delivery, storage or a sales force. It’s a gigantic savings. The large breweries don’t generate profit from owning and running The Beer Store and this is something critics frequently fail to understand. The monopoly is not profitable for the owners because it extracts profit on sales. It is profitable for the owners because it saves a frankly ridiculous amount of money on outlay. Large brewers don’t have to pay for a labour force for sales and delivery in the way you might have to in a completely privatized market.
The problem is that the beer industry doesn’t work the way it did in 1980 and never will again. The breweries that operated in 1980 were all capable of producing well over 300,000HL of beer at once. The largest craft breweries in Ontario at the moment hover around 75,000HL for tax reasons. There are currently 220 craft breweries extant or in planning over on the Mom and Hops directory. If you would like to visualize what that looks like, here is a map that was put together for me by a talented young geographer named Kevin Roy. (He would like me to tell you that the brewery data came from the Mom n Hops Brewers Directory 4.0 in March, and the population data is calculated from Statscan’s 2011 Census of Canada.)
The high point for Canadian beer consumption was 1978. We drank 106.5 litres of beer each. We’re currently down to about 64 litres a piece. That’s about 42.5 litres of beer per person less. That volume loss did not hurt craft brewers. Many of them didn’t exist yet. The large brewers lost that volume. They have shut down plants in Barrie and Etobicoke and Edmonton and Halifax and bottling lines in Vancouver. They lost 40% of their volume in 36 years and that’s terrible.
The truth of the matter is that The Beer Store is losing. Look at this polling data that Lorne Bozinoff at Forum Research was good enough to run for me last spring. People under 45 are equally likely to buy beer at the LCBO and at The Beer Store. The LCBO didn’t really sell beer until the mid-1980’s when The Beer Store had a month long lockout and managed to alienate beer drinkers province wide. Since then they have lost 50% of their customer base in what is practically a monopoly.
Let me say that again. In about 30 years, the large brewers who own the beer store have lost approximately 40% of their volume in sales and 50% of their customer base despite sweetheart deals, lobbying and a practical monopoly. If it were a real company rather than a cost offsetting device operated for the benefit of the owners, a series of CEOs would have had to resign in disgrace.
In contrast, there are the small breweries. Every year we get statistics from the LCBO about how much the Craft Beer retail segment has grown. The number is usually something like 30%. The total number is 575% since 2006. In truth, we don’t know how much Ontario Craft Beer could have grown if there had been an equitable distribution system for it. It has grown as much as the LCBO has allowed it to grow, so the 30% average growth is sort of nonsensical. The number could probably have been much larger than that except that there are really significant problems.
If the 1980 version of the beer industry was built around monolithic brands, the current model is built around niche products. To extend the metaphor from a previous blog post, we’ve got a distribution system designed for Network TV but what people are increasingly interested in is Netflix and free movie apps.
If you are a small brewer, you have a couple of options for distributing your product. First of all, you can attempt to get into the LCBO. The LCBO is not designed for beer sales. It does not have anything like the shelf space required to stock all of the products submitted. The LCBO is not obligated to stock your product. In fact, the shelves are so crowded at the LCBO that it is a nightmare attempting to find anything in a store. Sometimes, instead of your product, they will stock Norwegian Barleywine for no discernable reason.
This one. This cack was on the shelves for nine months in some stores whle other products were sku’ed out.
Any brewery can get into The Beer Store. All you have to do is pay a listing fee for each packaging iteration of your product and then pay a shelving fee for each store. It’s about $30,000 dollars for 100 stores for a single packaging format. If you’re a small brewery starting out, that’s an employee that you are going to have to forego. Additionally, since you are a small brewery, you probably make seasonal products. It would be ridiculous to pay $30,000 to shelve a beer for three months in a retail setting that discriminates against your product. Even Moosehead’s Hop City brand doesn’t do it and they have deep pockets. Barking Squirrel may be at the Beer Store but all the rest of their beers are LCBO only. (Next time you see an Oland brother making an argument in favour of The Beer Store feel free to ask him about this in a loud and vocal manner.)
If you’re a small brewery, there’s no guaranteed avenue of sales that doesn’t force you to pay your largest competitors. People have been making this argument for a very long time. It is not new information.
The difference is this: There are 220 small breweries out there already existing or in planning. There will be more. Each of these represents a business that is going to be someone’s life’s work. Even a very small brewery probably employs four or five people. If you look at the 2014 map from earlier, you’ll see they are everywhere. Until the last couple of years this wasn’t the case. Just about every city in Ontario now has a brewery. More than ever before, the public is identifying with the small brewers because they are their neighbours. The media coverage of the problem is not slowing down even a little and everyone is more aware of The Beer Store’s foreign owned monopoly than they were five years ago. The public is increasingly aware that small businesses owned by Ontarians are suffering at the hands of foreign owned companies.
Those are small businesses that probably employ a couple of thousand people directly and which are going to grow over the course of the next twenty to thirty years. They provide jobs upstream and downstream. More than that, they provide employment locally rather than in a central location. They provide a sense of local pride and let’s not forget those tourism dollars.
The large brewers, on the other hand, are shrinking. They are selling less volume and all you need to do is google Molson or Labatt and “layoffs” to see how they have been trying to achieve more with less over the last half decade.
If we don’t change the system in the near future we force the small businesses which have the potential to grow over the next twenty years and generate tax revenues and employment to stagnate by forcing them to compete in a business model that was outdated by the mid 1990’s. The large brewers will continue to shrink and as their size dwindles so will their ability to generate tax revenue for the province. Additionally, very large craft breweries from the United States who are not hampered by distribution as restrictive as we have here will be able to buy shelf space in The Beer Store eating away at both ends of the Ontario beer market from the middle. Sierra Nevada, New Belgium, Oskar Blues, Lagunitas, Stone are names that beer drinkers may welcome but which both Ontario’s brewers and government should fear.
If we do change the system in the near future, we have the prospect of the growth of small breweries over the next twenty years. We have the employment that they create and the revenue that they generate. We might have an export manufacturing industry. The American breweries are coming, but with Ontario’s small breweries freed up to compete, they will mostly take share away from the large brewers who are already losing.
Now, if I were a recently elected Premier of Ontario who had made it into office attached to a large scandal and it was being intimated by the Toronto Star (who recently brought Rob Ford and Jian Ghomeshi down and who do not ever seem to give up) that lobbying is the only reason The Beer Store continues to exist, I would think very seriously about pulling the trigger on The Beer Store’s situation. We are very nearly at the point where it would pay off as both a short term strategy for economic protectionism and as long term investment.
The majority of the public is in favour of getting rid of it and it can actually be spun as a long term economic strategy. What a PR coup it would be to be seen to be investing in the future of Ontario instead of maintaining a status quo which provides dwindling benefit and does not exist to serve consumers! The best part is that there is no reason not to go ahead with Ed Clark’s plan to bleed The Beer Store for a hundred million a year while reforming the system outside The Beer Store. If they complain of unfair treatment, remind them that they had 30 years to change their model and that they spent that time replacing dusty bottles with an iPad.
For the first time since I started writing, I’m actually optimistic that we’re within about 12 months of significant change.
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Beer tastes are subjective…you have knocked a great beer! Why did you not mention the multiple SKU’s of Bud etc???
http://www.ratebeer.com/beer/nogne-o-sunturnbrew/100027/
As for the so called “niche” beers at the LCBO, that is what customers want. We do not want the same beers that are available anywhere else and we look forward to the seasonal releases.
The customers wanted it so badly that they allowed it to sit on the shelves for nine months.
I often wonder how much the system would have to change for the big guys who own the beer store to just say “screw it, we don’t want to operate that thing any more”. I mean sure there is a huge advantage to having it, but at the same time as you mention sales of their products are dropping. Plus there has been talk about the government charging a franchise fee, not to mention the LCBO potentially selling 12 or 24 packs. Add to that the fact that there must be an insane amount of overhead to maintain all those buildings, and trucks and pay those employees.
With costs going up and sales going down there aren’t really a lot of options. I mean you can’t raise the price of a 24 of Canadian, when sales are already dropping without sales dropping further, and you can’t raise the listing fees for other brewers without even further bad press. So there has to be some kind of tipping point where the owners just say it is not worth it and tell the government they aren’t really interested in running the beer store and would rather that say Loblaws trucks pick up the beer from their central warehouses and deliver it to Loblaws stores, and Loblaws employees making minimum wage can sell the products. I am really curious to see if we will hit that point.
It’s not unreasonable. I think that they will milk The Beer Store for as long as there is significant advantage to be had.
You’re probably right. At the same time I am sure the big guys have an army of accountants who know things like how much sales will drop for every dollar a case of blue is raised. Those guys also know how many more expenses the beer store can handle before it becomes a liability that is just not worth it. If the government starts putting the squeeze to them, instead of just breaking up the beer store all together things could get interesting.
“The Beer Store’s organization is such that it works in your favour if you are a very large company. The fact that your beer can only be sold in predetermined locations and that the organization that runs those locations stocks those stores from centralized warehouses means that you don’t have to pay for delivery, storage or a sales force. It’s a gigantic savings. The large breweries don’t generate profit from owning and running The Beer Store and this is something critics frequently fail to understand. The monopoly is not profitable for the owners because it extracts profit on sales. It is profitable for the owners because it saves a frankly ridiculous amount of money on outlay. Large brewers don’t have to pay for a labour force for sales and delivery in the way you might have to in a completely privatized market.”
Thank you for not only a good and informative article, but also for explaining what TBS critics and proponents of a completely privatized system can’t seem to grasp. These factors, plus a nearly complete lack of retail markup by TBS, keep prices down. A completely open privatized system will result in far higher prices than anyone seems to/wants to realize.
As a TBS employee who defends their company and the current system on the frontlines of social media (whatever the hell that means. I seem to be wasting my time arguing with uninformed people or people on the OCSA/Strategy Corp. payroll 140 characters at a time. I need a new hobby) I can admit the many flaws of the current system.
The most obvious solution is to allow any brewer who brews under a certain hL threshold and is wholly Ontario owned and operated to obtain a license to operate whatever retail stores they desire in the province. No more closing up popular bottle shops in high-traffic areas when you move and upgrade facilities. No more begging to get on bloated LCBO shelves (which may now be filled with 12 packs of macrobrews in the near future, for some STUPID reason!) No more paying the moderately high costs of listing at TBS (but did you know that the $0.47-$0.51/L handling fee is ALL the money TBS collects off a sale? The rest goes to the much lower taxes for craft beer, and the brewer.) They can control their own destiny. The can form a co-op with other brewers like TBS started out as, or they can go it alone. That will most certainly result in more choice for the consumer, and results in more retail avenues to pursue for small brewers. Hell, if they they establish a machine as efficient as TBS, it might even drive prices down!
Personally, I just don’t want to introduce some slippery slope where anyone and everyone can sell intoxicants. I’m sure almost all will be responsible about it, but there are a few who will absolutely will not be. Letting those people have that kind of responsibility isn’t worth opening things up, in my opinion. You can’t allow WalMart, Weston, and yes even Couche-Tard to be responsible (as I believe they would be) retailers of beer without also allowing the sketchy stores that still sell synthetic drugs/illegal supplements/drug paraphernalia sell beer to whomever they please until a newly-beefed-up AGCO catches them enough times to shut them down. It is almost certain to cost too much; both to the taxpayers, and to society.
The craft beer problem has a very specific remedy: the option of CRAFT BEER STORES, and it’s time that dominated the conversation and not OCSA lobbying.
If you’re worried about kids getting drunk because they can buy from ‘shady’ store-owners you should know that they’ll find a way no matter how tight the regulations and it is naive to think that expanding sales channels will cause this just look at Europe, BC or Québec, do they have a youth drinking problem? No they don’t.
Also do you have any proof to back up your claim of 47c-51c/L and how does the $30,000 shelving fee figure into that?
The $30,000 shelving fee is made up of a product listing fee and 100 per store fees per packaging format. The TBS employee is not being misleading with that handling fee figure. They are basically legitimate, although the $30,000 fee is, I grant you, rounded very slightly for ease of use.
Actually, the base fee is (according to the Fraser Institute paper) $2650.14, and then $212.02 per store.
2650.14 + (100 x 212.02)= 23852.14
Not to be combative here (and maybe you were given a different number) but that’s a lot of rounding to get to $30000. 🙂
I think I got the handling fee figure from a Jeff Newton press release, It is close enough to legit for the purpose of this exercise.
I tell you what. Call it 24,000. That fair?
In point of fact, if you want to be really impressive why not give me the current figure instead of the Fraser Institute’s figure.
Absolutely fair. That’s the figure I’ve been using on Twitter.
Even an employee like me who has taken an interest in knowing all the facts so that I can argue correctly them does not have access. I really wish I did.
That’s the amazing thing. It is so byzantine that the public doesn’t get to know how it works at all. Even for the employees it isn’t easy. How hard a thing should this be?
The amazing thing is that when people talk about privatization driving the price of beer up, it’s the big brewers who are saying that. The craft brewers don’t benefit in nearly the same way from the distribution system and are already eating the costs on that sort of thing. They have to deliver kegs to bars and bottles to LCBO locations (if they want fresh stock on shelves). It’s already factored in in a lot of cases. I really don’t think it would hurt craft brewers all that much except for a couple of quite large ones who would suffer in the short term.
Listing with TBS does help craft brewers out a bit on the logistics end. I may be wrong, but I believe that they are not charged additional fees if they just ship to a TBS warehouse/cross-dock vs opting to deliver to stores themselves. Some brewers do this because of their size (Brick or Moosehead), and some do it to use the opportunity for an in-store visit.
I think that it will rise slightly due to new costs (a bigger sales force, for one) and more middlemen (stores adding a higher markup than TBS, potential wholesalers) but yes, craft beer will not go up nearly as much as beer produced by the big boys. I forget sometimes that you don’t really care what happens to macrobrewers. 🙂
You’re right. I don’t. Even a little
Shill!
We get it. You like your job, or at least having a job. You’d like to keep having said job.
And truth be told, we don’t need any more unemployed folk in this (or any) province.
But please save the “guardians of public safety” and “intoxicants” nanny-state BS.
The few times I am forced to buy at the local Beer Store – generally because the KGBO outlet next door is closed – half the stumblebums in line are piss-drunk, and they seem to have no problem buying another 24 of swill.
I’m not even sure that’s a legitimate criticism you’re leveling there. That’s the least Shill-y beer store employee I’ve ever talked to and he makes a cogent point about non chain convenience stores. I mean, I’d agree with you if he hadn’t ceded change to the system before even discussing public responsibility, but he’s being quite reasonable.
I am a homebrewer and have been for many years. I boycott the Beer Store and rarely go to the LCBO. I do find the LCBO needs more shelf space for Craft Beer. We definitely need Ontario Craft Beer stores and I would certainly shop there if they were allowed to open them like in any free society. Until then I will continue to brew my own tax free beer. Homebrewing is big in Canada and getting bigger all the time. The Ont gov’t loses tax money and that other place just plain loses 🙂
The only good thing abought TBS is returning the empties…..
Jordan,
Well written! There are plenty of like minded people in this discussion here and even the dissidents have thoughtful points. I’d like to tackle two side themes that have been touched on here (one only slightly).
The first is ‘social responsibility’. While I am no expert I have travelled extensively and seen many different models and seen many results first hand. I’ll admit I don’t have hard data, only anecdotes and my own experience, but here we go…
The ‘social responsibility’ propaganda being used by both the TBS and LCBO is hogwash. I’m guessing once this province is down to a population of less than 10% angry old white men (soon) this argument will no longer have an audience. Alcohol abuse is not just about access to alcohol for minors. It’s about access to alcohol for problem drinkers of all ages. Yes it is true that responsible merchants have a role to play, but price has a lot more to do with it. Jurisdictions I have witnessed rampant alcoholism (of all ages) in are all ones with no or very low legal minimum price floors. We have minimum pricing laws in this province that help discourage access to large volumes of booze for casual drinkers on the edge. All but the most determined and wealthy are given a reason for a second thought. Presumably any change in a retail model will continue with this type of government intervention.
As a self interested consumer, I’m sad to admit, this pricing model is important, but I have seen the pathetic ‘lager lout’ culture in the UK and parts of the USA first hand. No thanks.
Related to this, however, it the damage TBS does to our bar and restaurant industry. Their absurd markups to their commercial buyers may or may not determine the price we pay for a pint (legal minimums remain in place), but they definitely damage the profits of these businesses. If you are really concerned about ‘social responsibility’ wouldn’t you want well paid bar staff serving people rather than stressed facilities cutting corners?
The other point is this B.S. the TBS states about it’s recycling success. Let me just say this. The TBS does not recycle your empties – you do. If they were these gods of recycling, they’d come to your house and pick up your empties. Instead you schlep them to their facility and they claim it’s their great work. We could be schlepping empties anywhere. Remember when grocery stores took back pop bottles before PET bottles took over? I’m old enough to remember returning milk bottles.
Again, from my travels, I have seen systems where every container made from a reusable material (there are lots) is barcoded. Private companies set up kiosks (often at gas stations and grocery stores). You bring back everything and the machine sorts it according to the bar codes and dispenses your deposit (sorry, this is a non-unionized process). Any contractor could pull this off and probably with greater convenience and comprehensiveness (not just liquor containers) if the right legislation were in place. I recently heard you can even have your deposit returned to an e-account if you are in some Scandinavian and Baltic countries.
That, of course, would blow the minds of the kinds of bureaucrats and vested interests we have who can’t even fathom electronic payment for a bus ride…
Not being very knowledgeable about all the different industries I’ve been wondering why some of the grocery stores can sell wine..is tis under the LCBO? either way couldn’t a few of the craft breweries band together and do the same thing – have their products on a mini store? just wondering…..
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